Bond yields are rising, governments are carrying record levels of debt and policymakers are increasingly turning to unconventional measures to keep markets and currencies under control. From Washington to New Delhi and Ottawa, the same question is becoming harder to avoid: how much longer can governments keep borrowing, spending and intervening without creating new risks?
The latest warning signs are coming from the US Treasury market. The 10-year Treasury yield climbed to 4.76% on Monday, its highest level since January 2025, while the 30-year yield remained above 5.2%. Higher long-term borrowing costs are a problem not only for the US government but also for companies, households and stock markets.
The move has put Treasury Secretary Scott Bessent under pressure. The Treasury recently announced that it would at least double its purchases of long-dated government bonds, beginning in September, in an effort to support prices and contain yields. The intervention briefly calmed the market, but yields have since moved higher again.
The problem is larger than the bond market itself. The US federal deficit is running at roughly 6% of GDP despite relatively solid economic growth, while the cost of servicing the national debt continues to rise. At the same time, technology companies are issuing enormous amounts of debt to finance the artificial-intelligence investment boom, giving investors another alternative to government bonds.
Inflation is adding to the pressure. US inflation has remained above the Federal Reserve’s 2% target for more than five years, while renewed conflict between the US and Iran has pushed energy prices higher and complicated the outlook further.
That leaves new Federal Reserve Chair Kevin Warsh facing a difficult balancing act. At the Jackson Hole conference, in his first major speech since taking the job, Warsh signalled that inflation remains his primary concern and suggested that financial conditions are not restrictive enough to bring price growth back to target.
His remarks were notably more hawkish than his earlier communication. Markets interpreted them as a signal that the Fed could raise interest rates again rather than cut them. Two-year Treasury yields rose sharply following the speech, while longer-term yields were comparatively stable.
Warsh also made clear that he does not want to provide markets with a detailed roadmap for future rate decisions. For years, central banks have increasingly relied on forward guidance to shape investor expectations. Warsh has argued that this approach can leave policymakers trapped by their own promises.
Yet his message also highlighted a growing tension at the centre of US economic policy. Warsh appears comfortable allowing bond markets to determine prices based on economic fundamentals. Bessent, meanwhile, has been actively trying to influence those prices through Treasury buybacks and other measures.
The disagreement matters because higher long-term yields tighten financial conditions even if the Fed leaves short-term rates unchanged. Bessent wants lower borrowing costs to support growth and investment, while Warsh is warning that the economy may not be sufficiently constrained to bring inflation under control.
The same tension between market forces and government intervention is visible beyond the US.
India, for example, has turned to its enormous overseas population to strengthen its foreign-exchange position. The Reserve Bank of India offered banks subsidised currency hedging in an effort to attract dollar deposits from Indians living abroad.
The programme has proved remarkably successful. It is expected to have attracted roughly $100 billion into Indian banks, helping stabilise the rupee after the currency fell sharply as the latest Gulf conflict drove up India’s oil-import bill. The RBI has now brought the programme to an early close after saying that inflows had exceeded expectations.
For India, the intervention has effectively bought time. The country had been facing another year of balance-of-payments pressure, with foreign investors less enthusiastic about Indian assets and domestic companies sending more capital abroad.
But the policy also illustrates the price of financial intervention. By subsidising the currency hedging that protects dollar depositors from movements in the rupee, the RBI is effectively transferring part of the cost to itself.
Canada is taking a different route, using its energy resources to strengthen its position at a time of geopolitical uncertainty.
Oil producers are enjoying a powerful combination of higher crude prices and a weaker Canadian dollar. The country’s vast oil-sands reserves are among the largest in the world, and producers have recently reported sharply higher profits.
Ottawa is also becoming more supportive of pipelines. Prime Minister Mark Carney’s government is seeking to reduce Canada’s dependence on the US, which currently receives the overwhelming majority of Canadian oil exports. New infrastructure aimed at Canada’s Pacific coast could allow producers to reach Asian markets instead.
But here too, the boom faces limits. Oil-sands projects require enormous upfront investment and can take years before generating returns. Producers remain wary of committing billions of dollars to projects that could become uneconomic if oil prices fall or future governments tighten environmental regulations.
The common thread across these economies is an increasingly difficult policy environment.
Washington is trying to contain long-term borrowing costs while simultaneously confronting persistent inflation and a huge fiscal deficit. India is using its central bank balance sheet to attract foreign currency and stabilise its external finances. Canada is attempting to turn energy wealth into a long-term economic advantage while reducing its dependence on its largest trading partner.
All three approaches rely, to some degree, on governments shaping markets rather than simply allowing them to run their course.
That strategy is becoming more politically attractive as the global economy becomes more exposed to war, energy shocks, trade disputes and the enormous investment requirements of artificial intelligence.
The G20 meeting in Asheville, North Carolina, captures the same dilemma on a global scale. Bessent has called for stronger economic growth, deregulation, energy independence and measures to deal with sovereign debt. The US also wants its partners to join its campaign to economically isolate Iran, even as tariffs and geopolitical tensions have strained relations with many of those same allies.
The backdrop is increasingly uncomfortable. Global debt has reached extraordinary levels, borrowing costs are rising and the conflict around the Strait of Hormuz is adding another inflationary shock. At the same time, governments are being asked to finance new infrastructure, energy security and the AI investment boom.
For investors, the biggest question may therefore no longer be simply where interest rates are heading. It is how governments will respond when markets refuse to move in the direction policymakers want.
The experience of the past few months suggests that central banks and treasuries have plenty of tools at their disposal. But those tools are not free. The more governments intervene to control currencies, bond yields or the flow of capital, the greater the risk that they merely move financial pressure from one part of the system to another.
And with global debt still rising, that pressure is unlikely to disappear soon.
Be First to Comment